Who Doesn’t Need Social Security? Maybe 3 Percent of Households

Nov 02, 2016

Article By: Scott Burns

Q. In a recent column you described Social Security as “the big Kahuna.” You declared that "even the affluent need Social Security".

Further in the column you qualify that by saying "relatively affluent". But you never define "affluent.” For context, I was wondering what you consider to be affluent? In other words, by what measure would you say a person doesn't need Social Security? ---C.P., by email

A. Great question--- and I’m sorry I wasn’t more specific earlier. I’ve been critical of people who assume Social Security won’t exist. Why? Simple. The idea that Social Security won't exist is proof they are clueless about the importance of Social Security. But I’ve never figured out when Social Security isn’t “needed." So let’s look for a basic measure.

We can start with the percentage of income Social Security replaces for those at the top of the wage base---the $118,000 cap on income that is included in the benefits calculation. Workers who have always earned at the top of the wage base cap can expect Social Security benefits to replace about 25 percent of their pre-retirement income.

Most people would consider losing 25 percent of their income a major problem. Only about 6 percent of all workers earn more than the $118,000 Social Security wage base cap. So it’s probably fair to say that Social Security is important for at least 94 percent of all workers.

Now let's double or triple income over the wage base cap to $236,000 or $354,000. At that level Social Security benefits wouldn’t account for more than 8 to 12 percent of needed retirement income if they had successfully saved for their retirement. For people at that income level a drop that size is an inconvenience, at most.

That would put the threshold of irrelevance for Social Security up with the top 2 or 3 percent of earners.

And that’s why Social Security is so important.

Q. I am 60. I’m thinking about retiring in the next couple years. My wife is 67 and retired. We are currently 101 percent funded, for retirement, until age 90. I am concerned about the pending market correction that is being talked about. It may be a drop of 10 to 20 percent right about the time I retire. Am I wrong to think that I should not retire if my retirement takes that big a hit? Would it be best for me to continue working till it rebounds a little? ---J.S., by email

A. Financial planning types have a name for your worry: sequence of returns risk. A retirement portfolio that begins with a series of “good” investment years has a much higher chance of long term survival than a retirement portfolio that begins with a series of “bad” investment years. People who retired in the early 1970s, for instance, retired into a bear market and rising inflation. Many had to go back to work or drastically reduce their standard of living.

Those who retired in the late 1990’s have been having a similar experience, but with less inflation.

Those who retired in the early 1980s had the reverse experience— their savings increased rapidly, much faster than their spending needs. They were on the good side of sequence of returns risk.

There is a difference, however, between a market correction— a 10 percent drop in stock prices— and a major sequence of returns risk. If you put off retiring because of a 10 percent market decline, you might never retire. This is a good time for you to examine your living standard risk— how much your life will really be affected by a market decline.

Let me give you an example. Suppose Social Security provides 50 percent of your retirement income and your nest egg is expected to provide the rest. If stocks decline 20 percent and you are 100 percent invested in stocks, your spending ability will drop by about 10 percent. But if your nest egg is a more typical 50 percent in stocks, your spending ability will only drop by half that, 5 percent.

Rather than plan your retirement around market ups and downs, I suggest that you look at all the different ways you can deal with some fluctuation in your spending.

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